Sheng Siong - Benefiting From The Recovery In Consumer Spending

Sales grew 5% y-o-y, despite the closure of two outlets at the Verge and Woodlands. We believe the group would continue to enjoy the positive sales impact from the recovery in Singapore’s consumer sentiment.

Strong sales growth.

Sheng Siong achieved a decent 5% y-o-y growth in revenue in 1Q18. Excluding the closure of two supermarkets, it would have grown 13.1% y-o-y. We believe that it is a clear beneficiary of the recovering consumer sentiment in Singapore.

With four new outlets opened YTD, and two more that are scheduled to be opened in 2Q18, we believe the group could also deliver stronger results over the next three quarters.

Upside surprise from gross margin.

Sheng Siong’s gross margin expanded by 1ppt to 26.2% for 1Q18, even though its distribution centre was operating at full capacity. Management attributed this to a higher sales mix of fresh products.

We note that the group is building an extension to the existing distribution centre, which would bump up its capacity by 20% next year. As such, we are now more optimistic about its potential gross margin expansion, looking ahead.

Reiterate BUY, with a Target Price SGD1.18.

So far, the Housing Development Board (HDB) still has 10 new sites designated for supermarkets that are up for bids, for the rest of the year. We expect Sheng Siong to win at least two new stores in 2H18. This, coupled with the group’s stronger sales outlook and growth potential of its margins, leads us to increase our FY18-20F earnings by 2-6%.

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